Federal Estate Tax Exemption will Sunset after 2025… Plan Now!

Q: How will the Tax Cuts and Jobs Act (“TCJA”) affect my estate planning?

A: In December 2017, Congress passed the Tax Cuts and Jobs Act (“TCJA”). This tax bill was an overhaul of the tax law affecting individuals and businesses in many ways. One of these changes substantially increased the Federal estate tax exemption.

At the time the law was inked, the Federal Basic Exclusion Amount for an estate was $5.49 million ($5 million, indexed for inflation). This meant that no taxes would be owed on the estate of a person dying in that year with a taxable estate less than that. For estates over that amount, the overage was taxed at 40%.

The TCJA stated that for deaths in 2018, the exemption increased to $10 million, indexed for inflation. Currently, in 2023, the estate tax exemption is $12.92 million. This is an individual exemption, so a married couple enjoys $25.84 million between them.

While this increased exemption is helpful for many families, it is not a long-term solution. The law expanded the exemption but only for a limited period of time. Barring any action by Congress to extend this further, this and other provisions of the TCJA sunset at the end of 2025. As a result, where an individual dies on or after January 1, 2026, the exemption will return to the pre-2018 scheme of $5 million, indexed for inflation (likely to be just under $7 million). For single persons with less than $7 million in assets, and couples with less than $14 million between them, there is no cause for concern when it comes to Federal estate taxes, even after the sunset.

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With this looming sunset of the exemption amount, couples and single individuals may be able to take advantage now of the higher exemption amount with proper planning. An alphabet soup of tools are available including SLATs, GRATs, IDGTS, etc. The general idea being to remove assets from your taxable estate while you are alive, utilizing your expanded exemption, thus reducing the taxable assets at the time of death and passing more along to your beneficiaries. There are also planning mechanisms for the charitably inclined that will serve to further reduce one’s taxable estate.

For New Yorkers, the State estate tax, currently $6.58 million, has been the larger concern. Unlike the Federal, the New York exemption is not “portable” between spouses, meaning that the exemption of the first spouse to die cannot be saved to be used when the second spouse dies. Planning must be done to utilize each spouse’s exemption at the time of their respective deaths.

Not all planning opportunities will suit your individual circumstances. Determining the proper estate planning tools will depend upon your family structure, asset structure, and intended beneficiaries. You should speak with your estate planning attorney today to better plan for tomorrow.

Britt Burner, Esq. is a Partner at Burner Prudenti Law, P.C. focusing her practice areas on Estate Planning, Trusts & Estates and Elder. Burner Prudenti Law, P.C. serves clients from Manhattan to the east end of Long Island with offices located in East Setauket, Westhampton Beach, New York City and East Hampton.